Coronavirus – Economic Issues

Exploring the avenues to fill the budgetary gaps

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Investment rate, purchasing power

Mains level : Paper 3- Option to raise the money for package.

What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….

Containing the fiscal deficit through privatisation

  • Government is apparently hopeful that money could come partly from the new privatisation programme.
  • Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
  • According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
  • The PSEP is a strategic move intended to rationalise the public sector.
  •  Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
  • And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
  • Today, the government needs this money in order to contain the fiscal deficit.
  • So, the privatisation programme has suddenly been expanded.
  • The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.

Progress made so far on disinvestment process

  • Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
  • In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
  • The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
  • It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
  • Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.

Issues with privatisation

  • The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
  • Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
  • Excessive political interference with the private sector makes owning an ex-government entity risky.
  • A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
  • If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
  • This could foster crony capitalism and may even result in the making of oligarchs.

Where else can the government find the money it needs?

1. Increasing tax and duties on fuel

  • Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
  • The government imposed additional taxes while global crude oil prices fell.
  • As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
  • Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
  • An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
  • Low demand and lowest investment rate:  Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
  • And that’s why their investment rate had never been this low, in the 21st century at least.

2. Borrowing money and issues with it

  • Even if some privatisation helps India financially, it seems that the country will need to borrow money.
  • External borrowing, however, is problematic. There are three issues with external borrowing-
  • 1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
  • Which is unlikely to happen any time soon as a recession is round the corner.
  • 2) The rupee is at its lowest level compared to the US dollar.
  • Any more devaluation will only make it harder for the government to pay back its debt.
  • Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
  • The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
  • However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
  • Other countries may also move towards “atmanirbharta” and over-regulate imports.
  • 3)  Indian industries are already a bit debt-laden.
  • Following factors compelled industries to resort to overseas borrowing-
  • i)The risk in the banking sector, tight liquidity in debt markets,
  • ii) Comparatively lower international borrowing rates
  • iii) The RBI’s ECB rationalising measures.
  • More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.

3. Foreign reserves and other options

  • On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
  • The rest may have to come from privatisation, taxation, loans and more international aid.
  • Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
  • India may help others, but it needs aid too.

Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”

Conclusion

The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.

 

 

 

 

 

 

 

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